As part of prudent retirement planning, where you can obtain secure income cost effectively, it should be considered. Receiving secure income means you don’t need to overly rely on your other savings/investments, which removes some pressure from these assets. It may also mean you don’t need to take as much risk on your other assets to achieve a higher return, as there may be little or no need to do so.
In this article, we outline what the new State Pension is, the closing opportunity, why it’s worth looking at and how to address shortfalls.
What is the new State Pension and why is it attractive?
- Under the new State Pension, generally an individual needs 35 years of fully qualifying National Insurance (NI) credits to obtain the maximum State Pension, which is currently around £11,500 p.a. once you reach your State Pension age.
- To buy a similar secure income stream on the open market could cost around a quarter of a million pounds!
- To qualify to receive the new State Pension entitlement typically requires at least 10 years of adequate NI records.
The opportunity – why you should consider acting now
- To plug any shortfalls in your State Pension going back to April 2006, you must do so ideally by the fast-approaching deadline of 5 April 2025, although HMRC have recently announced that there will be some leniency to addressing this potentially months later, with a caveat that you must request a call-back on the government website before 5 April 2025.
- Under normal rules, you are limited to filling up shortfalls for the past six years, but the government has made a special concession, allowing people to address shortfalls beyond that period, as above.
- If you miss this opportunity, you can only plug gaps from 2019 onwards. In some scenarios, this could mean you permanently lose the ability to plug 13 years’ worth of shortfalls.
- In some cases, addressing these shortfalls could result in around an extra £120,000 income over the course of your lifetime (assuming you live to age 95).
Key points to note
The Triple Lock – Another key attraction of the new State Pension is it benefits from the “triple lock”. This means every April, the State Pension benefits will increase by the higher of (1) wage growth (the average wage increase from May to July of the previous year), (2) inflation (based on the previous September’s Consumer Prices Index), or (3) 2.5%. Over the longer term, benefitting from the compounding effect of these increases is extremely powerful.
Combined State Pension – Under the most recent State Pension figures at the time of publication, for those who are in a relationship, combined, that’s secure income of around £23,000 per year. If you are due to receive your State Pension in, say, 10 years, you could assume (thanks to the triple lock) that those combined benefits could be worth around at least £30,000 per year.
Cost to address shortfalls – It normally costs around £900 to purchase one year of NI shortfall, which produces around £330 extra income per year (these figures can vary depending on the exact year of shortfall). So, you’d only need to live for around three years after reaching State Pension age before you break even (ignoring tax for now).
How to address your National Insurance shortfalls
- Step 1 – Establish how many years’ shortfall you have. The quickest way is online: https://www.gov.uk/check-state-pension (or via the secure HMRC app) or, if you prefer paper applications, by submitting a BR19 State Pension Forecast form and returning it to the address listed on the form.
- Step 2 – Through the above link, HMRC say you should be able to check if you have gaps in your NI records, calculate if making a payment would increase your State Pension, and then make the payment if you wish to. HMRC recommends using the “pay by bank account” option online. Payments made this way will normally be reflected in your NI records within five working days.
- Alternatively, you can call the Future Pension Centre (0800 731 0175) – but note, there may be delays on the call!
Conclusion
The State Pension benefits on offer are very compelling, and for many people, they’re often missed or dismissed without fully understanding its merits – resulting in extra costs later down the line to address shortfalls, or simply a missed opportunity.
The State Pension, when combined with other savings/investments you have, can underpin, and form part of, a compelling retirement plan when structured correctly.
If this has prompted you to act around your wider retirement or financial planning needs, please reach out to me or your usual PWM adviser.
Andrew Mina
Partner
amina@partnerswealthmanagement.co.uk
020 7444 4061
The information and/or any reference to specific instruments contained in this article does not constitute an investment recommendation or tax advice. The contents of the article have been prepared solely for information purposes. The article contains information on financial products and services and such information is designed for and addressed solely to individuals seeking generic industry information. This document reflects our understanding of current legislation. Past performance is no guide to future returns.